Last week the U.S. House of Representatives approved a bill containing a provision to curtail settlements of patent litigation between innovator drug companies and generic drug producers. Supporters of the bill call these "pay for delay" settlements because they delay the entry of generic drugs into pharmaceutical markets. They hope the bill will hasten generic entry and lower the price of drugs. Unfortunately, banning pay-for-delay settlements will have almost no effect on the price patients pay for drugs and will reduce pharmaceutical innovation, harming future patients.

To understand how these settlements work, we need to review the Hatch-Waxman Act of 1984, which lowered the regulatory barriers preventing generic drug producers from entering pharmaceutical markets. But the Act had an important catch: The generic producer could not enter if it infringed on an innovator's drug patent.

Initially, generic competitors used the Hatch-Waxman Act to enter drug markets only after an innovator's patent naturally expired, on average 12 years after Food and Drug Administration approval. In time, generics grew bolder and began challenging drug patents before they expired, arguing that the patents were invalid and should be terminated early. After a few costly court battles, innovator companies and generic producers began settling their disputes out of court.

Under these pay-for-delay settlements, the innovator would share a portion of its monopoly profits if the generic dropped its patent suit and delayed entry. Courts must approve each settlement; if the settlement delays entry past the natural expiration of a drug's patent, it would be successfully attacked under antitrust laws as a restraint of trade. Thus the primary effect of these settlements is to prevent the early termination of existing drug patents.